In his latest guest blog Don Hollingum from Direct Debit 101 has been thinking about addressing failed payments.

For more information visit: www.directdebit101.co.uk

Introduction

Cashflow is the lifeblood of every enterprise regardless of whether it is producing and / or selling goods, providing services or collecting donations for worthwhile causes. 

Needless to say income exceeding expenditure is key to ensuring the survival of the enterprise, and whilst the vast majority of payments due to enterprises are likely to be received correctly, i.e., the right amount at the right time, the remaining minority of payments can be a real problem and cost the enterprise a disproportionate amount to resolve.

Receiving payments

Payments are received from a wide range of consumers, including other enterprises of different types and sizes and private individuals. Increasingly today, payments can be made / collected through a number of different channels but essentially they fall into two distinct categories:

  1. ’push payments’ where the entity paying / owing the money initiates the payment themselves either as a series of one-off payments (e.g., generated via electronic banking or cheques), or as part of a defined number of automated payments, (e.g., Bacs Direct Credit or Faster Payments), or
  1. ‘pull payments’ where the enterprise due the payment collects amounts due from the debtor, (e.g., via Direct Debit).

Whichever mechanism is used, and in many cases it will be a combination of the two types, push and pull, the enterprise that is to receive the payments needs to have processes and procedures in place to ensure that the right amount is received at the right time, and where this does not occur, have a defined escalation process in place to ensure monies are ultimately received.

Whilst it is likely that these reconciliation processes are undertaken at least partially in an automated form, there will undoubtedly be a financial cost to establishing and maintaining the process. 

In addition escalation, engaging with the debtor, can be both costly and time-consuming and will need to reflect both the non receipt of the payment and any failure of payments that are received, e.g., unpaid cheques, or Direct Debits. 

The cost in financial terms of ‘chasing’ and receiving these outstanding payments will vary from enterprise to enterprise and be impacted by both the volumes involved and the processes employed.

Addressing non payment / failed payments

Some enterprises may just accept non payment and / or failed payments as a cost of doing business and ‘muddle through’ as best they can and hope that such incidences won’t recur. 

In many cases this may be true, i.e., future payments will be received, but without some analysis how can this be monitored, understood, and perhaps solutions put in place?

Some questions that would need to be understood include:

  • Which consumers are not paying (enterprises or private individuals)?
  • Are there any repeat offenders?
  • What are the causes?
  • Are payments ultimately successfully received and if so how late (and at what cost to the recipient enterprise)?

Answers to these and other questions can provide an understanding of the issues at play and indicate a number of possible actions or remedies that may alleviate the same scenarios occurring in future. 

Regrettably there may be situations where recovery of all outstanding payments is not possible, however an understanding of the causes of incidents of non-payment and failed payment is likely to reduce administrative overheads in dealing with them in the longer term.

Let’s consider some scenarios

Consumers who are private individuals are likely to be reliant of wages / salaries or a pension. Whilst most salaries and pensions are paid on a regular date, some employment types result in the individual receiving funds on a less frequent basis. When agreeing that payments can be made over a term, does the enterprise understand enough about its customer that will be effecting the payments (i.e., the debtor, or donor in the case of a charitable payment)? 

Whilst it may suit the enterprise to receive payments say monthly, it could be that the debtor receives funds weekly or at some other irregular date making monthly budgeting a challenge. 

Equally, even if the debtor is paid monthly, expecting payment a day or two before the debtor receives their income could also pose budgetary issues. Perhaps moving the payment date by a few days or offering different payment periodicities could benefit both parties.

The above could be established by engaging with the customer (debtor) either at the time the contract / payment cycle is agreed or at the time of non/failed payment. 

Lack of funds could be linked to the payment periodicity or the payment date but then again could the enterprise be doing more, for example generating an electronic reminder to the debtor a few days before the payment is due as a prompt to effect the payment or ensure funds are available?

The above might prove effective even where Direct Debit is being used and the enterprise is compliant with the Direct Debit Scheme rules and is issuing the required advance notice. 

Thinking about advance notice for a moment, is the enterprise sending this at the right time to the right person at the right ‘address’ (by address this could be postal or electronic)?

Are the enterprises records up to date, e.g., do they hold the correct contact information, and/or how ofter are these details reviewed?

There may be other indicators to help enterprises. 

For example where payments are collected by Direct Debit, and there is a payment failure, each failed payment is detailed on a report which includes a reason code indicating the reason for the failure. The reason codes are something else that can be analysed.

If analysis of non-payment suggests that the consumer just ‘forgets’ to make the payment(s), then are they using the most appropriate payment method for them? 

Why not recommend the use of Direct Debit or, moving forward, consider the new channel Request to Pay?

Whilst not directly non-payment or a payment failure, when Direct Debit is used it is possible that an indemnity claim is received some time after the payment, or payments have been collected. 

As was referenced earlier with regard to unpaid Direct Debits, a reason code is provided when an indemnity claim is submitted by the consumers PSP and a review of, or analysis of, these reason codes can be revealing at both an individual consumer level and also as a way of assessing how the enterprise is operating Direct Debit. 

For example, it may be possible to identify some themes (single points of failure) if a particularly high proportion of indemnity claims received carry the same reason code. 

Depending on the most prevalent reason code it may be appropriate to review or check such things as: 

  • the enterprises customer verification processes
  • that advance notice is being issued at the appropriate time and through a channel the consumer is expecting
  • that payments are being collected on the correct date and that the amounts reflect those referenced in the advance notice   

In conclusion

Dealing with non-payment or failed payments is likely to be a costly exercise for any enterprise and robust administrative procedures will help to identify such incidents at an early stage.

Whilst being a further administrative overhead, an analysis of non and or failed payments as referenced above may help to identify common themes and enable appropriate actions to be taken for the benefit of both the enterprise and the consumer.

Automated processes to escalate matters with the consumers concerned may help to reduce the costs of recovery however such an approach may not enable some of the aspects referenced in this article to be identified, hence the problem could recur with the same consumer. 

A more balanced approach may be appropriate to understand the reasons why.

Regrettably some instances of non-payment or failed payments may not be easily resolvable and more costly recovery actions may become appropriate. It is important therefore to ensure that the enterprises own processes and procedures are robust before embarking on such activities.

We would welcome the opportunity to engage with you directly on any aspects within this article, please email Don   at DirectDebit101@northeypoint.co.uk, visit us at www.directdebit101.co.uk or call us on 01245 79 1983.